In this morning’s “On Our Radar” research note, we are highlighting AAX with a Trading Buy call and target price of RM0.49. This indicates a potential upside of 27.3% from yesterday’s close, underpinned by a long-awaited turnaround story after years of lacklustre performance. To recap, AAX has been registering losses up till FY15. However, in 1H16, the company raked up a CNP of RM107.3m on: (i) yield improvements (+5%, YoY), (ii) improved load factor of 79% (+8ppt, YoY) on the back of higher capacity (+12%, YoY), ( iii) the return of Chinese tourist, and (iv) low fuel cost environment.

Going forward, we believe that AAX should be able to replicate its 1H16 performance as they move into 2H16 and also FY17 premised on the factors above. AAX is currently trading at a mere 6.3x FY17E PER compared to other low-cost carriers which are traded at an average PER of 9.3x. Hence, we believe that our RM0.49 target price is conservative, based on 8.0x FY17E EPS.

From a charting perspective, AAX is positively biased, with the overall technical picture indicating investor’s willingness to enter on weakness. From here, we expect a gradual grind higher towards RM0.43 (R1) and RM0.49 (R2) over the next 2-3 months. Investors who wish to gain a leveraged exposure may consider AAX-CW (strike @ RM0.42) which offers an effective gearing of 2.82x. For this structured warrant, a 27.3% increase in the underlying price to RM0.49 would translate to approximately 77% gain in AAX-CW to RM0.14.

Structured Warrant Strategy:

Since we expect a steady climb towards RM0.49 (+27.3%) over the coming 2-3 months, investors should opt for a more conservative strategy in favour of Call Warrants, which are (1) In-The-Money or Close-To-The-Money, (2) longer-dated, which is less susceptible to time decay, and (3) lower implied volatility.

For these reasons, we like AAX-CZ (strike RM0.45) and AAX-CW (strike RM0.42), which both offer an effective gearing of 2.82x. Our preference is towards AAX-CW, which has the advantage of being Closer-To-The-Money, longer time to expiry and also trades at a more reasonable implied volatility.

Source: Kenanga Research - 30 Sep 2016